ConocoPhillips (COP)

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See all 4 Bulls Reasons Bulls: Reasons To Buy collaborating with others internationally keeps competition at bay 100% agree collaborating with others internationally keeps competition at bay While diversifying its operations in international markets, the company has entered into collaborative agreements with local players to reduce competition. ConocoPhillips (COP) has signed an interim agreement with Abu Dhabi National Oil Co. to develop the Shah Gas Field in... read more View or Edit Reason 1 votes 100% agree Benefits from rising demand for oil 0% agree Benefits from rising demand for oil Since, ConocoPhillips has one of the largest oil and gas reserves and refining capacity in the U.S, the increasing demand for oil and energy products in the U.S will provide ConocoPhillips with an opportunity to increase its revenue and improve its overall financial condition. View or Edit Reason 0 votes 0% agree Fully integrated is better 0% agree Fully integrated is better ConocoPhillips is present in all stages of the supply chain, which enables the company to increase revenues as well as profitability. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell hurricane risk 100% agree hurricane risk As with other oil and gas companies, ConocoPhillips is exposed to the risk of natural disasters such as hurricanes, which have the potential to damage its refineries and disrupt production. View or Edit Reason 1 votes 100% agree Competes with larger companies that have government backing 0% agree Competes with larger companies that have government backing ConocoPhillips is facing intense competion from large national oil companies backed by their home governments, making it difficult for the company to access oil and gas reserves. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Avinash Gandhi Diwaker Related Articles Exxon Mobil (XOM) CONOCOPHILLIPS (COP) ChevronTexaco (CVX) BP (BP) Valero Energy (VLO)

Since the middle of 2007, oil prices have risen to record highs. Though this has crunched margins for COP's refining segment, which makes up 45% of the company's revenues^[2], it has pushed E&P margins through the roof, taking the company to record revenues and profits. With oil prices so high and the bulk of the company's production occurring in the maturing North American and European regions, ConocoPhillips has more incentive than ever to expand internationally. This exposes the company to significant risk, however, as many of its most lucrative international reserves are in politically turbulent countries. In 2007, Venezuela's leader, Hugo Chavez, expropriated COP's assets within the country, forcing the company to take a $4.5 billion loss.^[3] With billions invested in Lukoil, the company faces a similar risk in Russia from Vladmir Putin. ConocoPhillips also faces domestic risks from environmental regulation, which sometimes causes the company to have to pay millions of dollars in reparations (for example, $423 million in damages for contaminating groundwater with methyl tertiary butyl ether^[4]), as well as from the growth of renewable energy in the U.S., spurred on by state renewable energy initiatives and a Presidential election in which both leading candidates are determined to fight climate change. ConocoPhillips competes with the international oil majors, including Exxon Mobil, Chevron, Shell, BP, and Total.

[edit] Business and Financials

ConocoPhillips was formed by the merger of Conoco Inc. (Conoco) and Phillips Petroleum (Phillips) in 2001. It is a vertically integrated petroleum company with operations in more than 40 countries.^[5]

Source: 2007 Annual Report^[6]‎

• Exploration and Production: The E&P segment is mainly involved in the exploration and production of oil and natural gas, as well as the marketing of natural gas and natural gas liquids. ConocoPhillips' 2007 proved reserves contained 10.6 billion barrels of oil equivalents.^[7] It's oil production averaged 770 MBbl per day, its LNG production averaged 155 MBbl per day, and its natural gas production averaged 5 Bcf per day.^[8]
• Lukoil Investments: ConocoPhillips owns a 20% share of Russian oil major, Lukoil. Its share of Lukoils's upstream production included 401 MBbl per day of oil, 256 MMcf of natural gas per day, and 214 MBbls of refined petroleum per day.^[9]
• Midstream: COP's midstream segment "gathers" natural gas, moving it from the well to the pipeline, and processes it, breaking it down into individual components and purifying it for use. On April 8th, 2008, COP announced that it would build a pipeline, in partnership with Chevron and Exxon Mobil, that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand^[10].
• Refining and Marketing: Petroleum refining operations turn crude oil into the petroleum products that people use everyday, like gasoline and diesel. ConocoPhillips is the second largest petroleum refiner in the U.S and the fourth largest refiner in the world. The company owns 12 refineries in the U.S and either owns or has an interest in six European refineries. At the end of 2007, ConocoPhillips' total refining capacity was 3.245 million barrels per day, down from 2006 levels of 3.476 million barrels daily.^[11] This decline could be linked to the Venezuelan seizure of ConocoPhillips refineries. The company has a distribution network of 13,600 branded outlets in the U.S, Europe, and the Asia Pacific. Its products are marketed under brand names Phillips 66, 76 and Conoco brand in the U.S and under the Jet and ProJet brands in Europe and the Asia Pacific region.
• Chemicals: COP's chemicals segment is essentially the company's 50% share in Chevron Phillips Chemical Company LLC, a JV between ConocoPhillips and Chevron. It processes petroleum into petrochemicals.^[12]

ConocoPhillips posted revenues of $187.4 billion and a net income of USD 11.89 billion in 2007, compared to revenues of USD 184 billion and a net income of $15.55 billion in 2006. Though revenue rose from 2006 by about $3 billion, income fell by nearly $4 billion.^[14] This significant fall in operating margins was due to the Venezuelan expropriation of ConocoPhillips' assets in the country, which cost the company $4.5 billion after taxes.^[15] Earnings adjusted for the expropriation were $16.4 billion. Furthermore, a 4Q07 tax hike in Alaska cut ConocoPhillips' income by $234 million.^[16]

In the first quarter of 2008, the company saw net income of $4.1 billion - over a third of the company's net income for the full year 2007. This can be attributed to skyrocketing oil prices. The company produced 1.79 million BOE per day, down from 4Q07's 1.84 million BOE and 1Q07's 2.02 million BOE. though its oil refining (downstream) business saw productivity decline as capital utilization dropped 6% year on year. International refining margins fell 6% from 4Q07 and 5% from 1Q07, because of rising commodities prices and oil prices.^[17]

In the second quarter of 2008, ConocoPhillips saw quarter-on-quarter upstream production (excluding Lukoil, including syncrude) decrease by 60,000 BOE.^[18] Net income was $5.4 billion, up 12.5% year-on-year.^[19] Production was 2.2 million BOED, and refining capacity rose 89% to 93% sequentially. Realized crude prices averaged $118.01 - over $23 higher than in 1Q08. Prices were $9.87/MCF, $1.84 higher.^[20]

[edit] Trends and Forces

[edit] Rising Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips

Since the middle of 2007, oil prices have been trending upwards, to record highs; on the 21st of May, 2008, for example, oil traded at $134.10 per barrel^[21], after averaging around $20 during the 1990s.^[22] These rising oil prices have driven COP's E&P margins so high that the first quarter's total income was over a third the company's total income for 2007.^[23] The company, however, earns about 45% of its revenue, not including its Lukoil investment, from its Refining & Marketing segment.^[24] Since oil is the primary input for a refiner, when oil prices rise, refining costs rise. In the first quarter of 2008, right after oil prices hit $100/barrel for the first time, COP's oil refining (downstream) business saw productivity decline. Capital utilization dropped 6% year on year. U.S. refining margins fell $3.56 per barrel from the fourth quarter of 2007, while international refining margins fell $0.30 per barrel (international demand for refined products is rising, while U.S. demand is falling).^[25]

[edit] International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses

As one of the oil majors, ConocoPhillips control oil resources in countries around the world; with oil prices soaring, the company's E&P segment has a strong incentive to push forward and explore in countries that are less politically stable Most of COP's petroleum comes from North America and Europe, two regions where oil production is declining; expanding around the globe allows the company to keep growing its average reserve life.

An international presence makes the company highly vulnerable to terrorism. In early July, 2008, the company penned a $10 billion deal to develop the Shah natural gas field and build a one bcf gas-processing facility in the United Arab Emirates.^[26] Just a month earlier, however, the U.S. released a high-alert warning for its citizens living and working in the region - after the UK did the same.^[27] A terrorist attack on one of COP's facilities would halt production and hurt employees, leading to higher costs and lower margins.

Exploitation of natural resources in other countries also puts COP at risk of property loss from nationalization. For example, ConocoPhillips' 3Q07 income of $3.7 billion appears to be many times higher than the 2Q07 income of $301 million. In 2Q07, however, the company's Venezuelan assets were seized by Hugo Chavez, causing the company to lose $4.5 billion of expected income.^[28]

COP's investment in Lukoil is another example of the benefits and possible risks of international expansion. Lukoil has the second-largest reserves of any publicly-traded oil company^[29], and ConocoPhillips has a 20% share of the value generated by them. Russia, however, has gone through numerous upheavals in the last century, and, with Vladmir Putin in power, is less friendly about its resources than it has been in years. In 2006, the Kremlin forced Shell to cede 50% of its share of the lucrative Sakhalin-2 gas field to Gazprom, the state-controlled oil company, at below-market prices by using "environmental concerns" to pressure the company.^[30] In early 2008, the Kremlin made multiple raids of BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage; a little over a year before, Gazprom expressed interest in the $40 billion TNK-BP project.^[31] All these events indicate that the Russian government has no problem with pressuring companies into ceding their interests in Russian petroleum projects, especially at lower price, after significant capital has been sunk into the projects. With a 20% stake in Lukoil, ConocoPhillips is risking significant losses, especially if the Kremlin decides to nationalize Lukoil and its assets.

[edit] Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.

Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and it is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022^[32], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.

Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while the Democratic candidate for President has pledged to reduce carbon emissions 80%, to below 1990 levels by 2050.^[33] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but in the first quarter of 2008 ConocoPhillips sold 74% of its petroleum in the U.S.^[34] A changing American environmental and energy legislation landscape would be disastrous to COP's business without the development of some effective carbon sequestration technology.

[edit] ConocoPhillips Often has to Pay Recompense for Environmental Damages

Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by COP's operations occur to the extent that they break environmental protection laws, the company is sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, ConocoPhillips, Shell, BP, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether^[35], an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.

[edit] Competition

The major competitors of ConocoPhillips are the oil majors: BP, Exxon Mobil, Valero, Chevron, Royal Dutch Shell, Total S.A., etc.

The table provided below compares the operational metrics for ConocoPhillips vis-à-vis its competitors in 2007.

The oil majors face intense competition from national and state-owned oil and energy companies. Governments in oil-rich countries support these companies and give them preferential access to reserves by prohibiting direct foreign investment in oil exploration and production projects. Further, investments made by foreign companies are made unattractive by the government through taxation and other measures. Oil and gas companies, such as ConocoPhillips, thus face problems in gaining access to oil reserves and commencing operations in spite of their large size.

 ConocoPhillips

	Select All  |  Select None Metrics Revenue from Exploration & Production Revenue from Marketing Gross Wells Net Productive Gas Wells Net Productive Oil Wells Net Productive Wells Number of Refineries Oil Sales Natural Gas Sales Proved Natural Gas Reserves in Cubic Feet Proved Oil Reserves in Barrels Refining Capacity in Barrels per Day Retail Outlets Distributor Outlets Annual Production of Oil & Liquids in Barrels Annual Production of Natural Gas in Cubic Feet Operating Income Average Natural Gas Price / 1000 Cubic Feet Average Price per Barrel Average Daily Production of Natural Gas in Cubic Feet per Day Average Daily Production of Oil & Liquids in Barrels per Day Net Income Cancel

	Select All  |  Select None Companies ChevronTexaco (CVX) BP (BP) Exxon Mobil (XOM) ENI S.p.A. (E) PetroChina Company (PTR) Repsol YPF S.A. (REP) Total S.A. (TOT) Royal Dutch Shell (RDS'A) LUKOIL (LUKOY) ConocoPhillips (COP) Petrobras (PBR) BG Group PLC (BRGYY) Cancel

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Company	Data From	Average Natural Gas Price / 1000 Cubic Feet	Average Price per Barrel	Average Daily Production of Natural Gas in Cubic Feet per Day	Average Daily Production of Oil & Liquids in Barrels per Day	Net Income
BP (BP)	2006	$4.72	$61.9	8.42B	2.48M	$22.6B
ChevronTexaco (CVX)	2006	$4.85	$57.5	4.96B	1.73M	$17.1B
ConocoPhillips (COP)	2007	$6.26	$69.5	5.34B	1.26M	$11.9B
Exxon Mobil (XOM)	2007	$5.29	$66	9.38B	2.62M	$40.6B
Royal Dutch Shell (RDS'A)	2007	$7.15	$72.5	8.21B	1.82M	$31.9B

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[edit] References

1. ↑ COP 2007 10-K, Page 66
2. ↑ COP 2007 10-K, Page 53
3. ↑ COP 2007 10-K, Page 11
4. ↑ The New York Times: " Oil Giants To Settle Water Suit "
5. ↑ COP 2007 10-K
6. ↑ COP 2007 10-K, Page 53
7. ↑ COP 8-K · For 2/19/08
8. ↑ COP 2007 10-K
9. ↑ COP 2007 10-K, Page 66
10. ↑ MarketWatch: "BP, Conoco team up on major Alaska gas pipeline"
11. ↑ COP 2007 10-K
12. ↑ COP 2007 10-K
13. ↑ COP 2007 10-K
14. ↑ COP 2007 10-K
15. ↑ COP 2007 10-K, Page 11
16. ↑ BNET: "ConocoPhillips Reports Fourth-Quarter Net Income of $4.4 Billion Or $2.71 Per Diluted Share"
17. ↑ http://www.conocophillips.com/newsroom/news_releases/2008news/04-24-2008.htm ConocoPhillips News Releases: "ConocoPhillips Reports First-Quarter Net Income of $4.1 Billion Or $2.62 Per Share"]
18. ↑ MarketWatch: "ConocoPhillips Second-Quarter 2008 Interim Update"
19. ↑ MarketWatch: "ConocoPhillips' net income up 13%"
20. ↑ SeekingAlpha: "ConocoPhillips Inc. Q2 2008 Earnings Call Transcript"
21. ↑ Reuters: "Oil surges over $134 on supply woes, weak dollar"
22. ↑ Oil Prices Chart
23. ↑ COP 1Q08 10-Q
24. ↑ COP 2007 10-K
25. ↑ Seeking Alpha: "ConocoPhillips Q1 2008 Earnings Call Transcript" Page 2
26. ↑ MarketWatch: "ConocoPhillips joins $10 billion Abu Dhabi project"
27. ↑ The National Terror Alert Response Center: "US Puts Citizens In UAE on Terrorism High Alert"
28. ↑ COP 2007 10-K, Page 11
29. ↑ http://www.lukoil.com/
30. ↑ BBC News: "Shell yields to Gazprom pressure"
31. ↑ Energy Business Review: " Gazprom confirms TNK-BP interest, more gas deals"
32. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
33. ↑ Washington Post: "A Green(er) Obama"
34. ↑ COP 1Q08 10-Q
35. ↑ The New York Times: " Oil Giants To Settle Water Suit "
36. ↑ COP 2007 10-K
37. ↑ RDS 2007 10-K
38. ↑ XOM 2007 10-K
39. ↑ CVX 2007 10-K
40. ↑ BP 2007 10-K
41. ↑ LUKOIL Company: General Information
42. ↑ E 2007 Annual Report
43. ↑ Total 2007 Results Press Release
44. ↑ SUN 2007 10-K
45. ↑ CVX 2007 10-K
46. ↑ VLO 2007 10-K
47. ↑ XOM 2007 10-K
48. ↑ RDS 2007 20-F
49. ↑ SHI 2006 Fact Sheet
50. ↑ WNR 2007 10-K
51. ↑ COP 2007 10-K
52. ↑ BP 2007 20-F
53. ↑ LUKOIL Company: General Information
54. ↑ E 2007 Annual Report
55. ↑ Total Website: "From Crude Oil to the Consumer"
56. ↑ Conversion factor is 1 BPD = 50 tonnes per year
57. ↑ Obtained by Dividing Total Throughput of 2.413 MMBPD by utilization rate of 89%
58. ↑ Sinopec Refining Overview
59. ↑ ^{59.0 59.1} 2006 BP, 20-F, Item 4, Pg 12
60. ↑ ^{60.0 60.1} 2006 BP, 20-F, Item 8, Pg 201
61. ↑ 2006 BP, 20-F, Item 8, Pg 88
62. ↑ ^{62.0 62.1} CVX, 2006 10-K, Item 15, Pg FS-68
63. ↑ ^{63.0 63.1} CVX, 2006 10-K, Item 1, Pg 5
64. ↑ CVX, 2006 10-K, Item 15, Pg F-27
65. ↑ ^{65.0 65.1} COP, 2007 10-K, Item 8, Pg 185
66. ↑ ^{66.0 66.1} COP, 2007 10-K, Item 18, Pg 184
67. ↑ COP, 2007 10-K, Item 8, Pg 103
68. ↑ ^{68.0 68.1 68.2} XOM, 2007 10-k, Item 15, Pg 81
69. ↑ ^{69.0 69.1} XOM, 2007 10-k, Item 15, Pg 28
70. ↑ ^{70.0 70.1} RDS, 2007 20-F, Item 10, Pg 11
71. ↑ ^{71.0 71.1} RDS, 2007 20-F, Item 4, Pg 26
72. ↑ RDS, 2007 20-F, Item 4, Pg 4